emerge from bankruptcy with equity swapped to eliminate
large debt loads. Why do some emerge then hire investment
bankers for a review over Section 363 sales during Chapter

11?

Clark: I think they imagine they’re going to get a higher return
on their investment. In a forced bankruptcy sale auction process,
usually it’s a structured event with a stalking horse bidder. For
any competitive bid to come in, it has to beat the stalking horse
by 5% or some clearing price. More often than, not the stalking
horse purchaser ends up with the properties. There have been
some competitive auctions in a bankruptcy court in front of a
judge, but for the most part sales in bankruptcy auctions were
disappointing for the company and its creditors. I don’t think
people believe 363 sales are
as successful as reorganizing, cleaning up the properties, investing capital as
needed, and selling in a
negotiated process outside
of bankruptcy. In this
downturn we’ve seen companies going into bankruptcies, much more organized. They’re usually
pre-packaged, or at least
pre-agreed, with a restructuring agreement put in
place—usually including
debtor in possession financing. If you have a freef-all bankruptcy without
advance agreements, you
end up with different constituent groups fighting
among themselves, and
then the only answer may
be to sell.

OGFJ: Recent industry events have hosted natural gas weighted
companies with an overall outlook trending positively as exports continue to grow. What could we possibly see in terms
of an outlook for natural gas in 2018?

Clark: I can’t predict natural gas prices, but I do think it’s another
result, perhaps an unintended consequence, of OPEC actions.
Shale production of natural gas and associated gas is so prolific
that there’s not enough demand domestically to absorb it so we
have to go international. Cheniere turned an LNG import facility
into an export facility. Now there are dozens of LNG export
projects under construction or permitted for construction. It’s
another fascinating aspect of our industry—how shale production
has changed not just global markets but that the world balance
of power has changed because of US shale production.

OGFJ: What about crude oil?

Clark: If you exclude unforeseeable disruptive events, it seems
to me that the market is nearly balanced. There’s sufficient domestic demand growth to absorb the increases in domestic
production. Overall, prices, having stayed within a tight price
band around $50 barrel for some time, which seems to indicate
a supply and demand balance. I don’t know what future market
conditions will bring, but there are a lot of smart people out there
looking at that, and if they saw an opportunity they’d be bidding
up the price or undercutting the price, and it doesn’t seem that’s
happening.

OGFJ: Looking back at 2017, what are some of the things that
stand out in your mind?

Clark: Recovery. Innovation and technological
improvements across the
board. At Haynes and
Boone, what we saw was a
structural transformation
in the capital debt and equity markets. The traditional model for almost a
century used to be that the
independent producer
borrowed money from
friends and family, drilled
a few wells, built things up
slowly and steadily, and
created a company. Since
the economic downturn of
‘08-‘09, the model has been
different. Private equity
has money to put to work
and if they can find a good
management team, they will back the management team with
hundreds of millions of dollars to acquire production and become
an instant company. In our borrowing base survey for the fall of
2017 we asked how many of the new loans booked in 2017 were
private equity backed management teams. The responses were
consistent with what we’ve seen…70% of the activity in the industry today is private equity driven. Ten years ago it would have
been considerably less, and 20 years ago it would have been zero.
I don’t know if it’s a good transformation long-term or bad. Private
equity may like oil and gas today, but they may not like it tomorrow. Private equity has more of a buy and flip mentality. They
want to get in and get out, not build a company for 20 years. Their
investors are looking for a return on investment within five years.
It seems to me that would increase volatility in the industry.
Volatility can be good or bad. I don’t have a crystal ball, but that’s
what stands out for me at this point.